Armed forces will be on standby to help councils and police provide disaster relief if key infrastructures such as hospitals, water supplies and roads are hit by the electronic change.
The Home Office confirmed yesterday that local authorities are being encouraged to draw up contingency plans to deal with the "nightmare scenario" of failed traffic lights, disabled water pumping stations, fuel shortages and other disrupted services.
The bug, which represents the inability of most computers and electronic systems to deal with the change of date from 1999 to 2000, could also hit vital equipment in hospitals, lifts, benefits payments and phone lines.
Most computer experts believe that major failures are unlikely, but councils, which have a statutory duty to provide emergency relief, have been told to prepare for the worst. They will be allowed to use the Armed Forces Military Aid to Civil Authorities Act to call in emergency help.
The plans emerged as the Government's Action 2000 group held the first meeting of all private and public sector bodies involved in maintaining the nation's infrastructure.
Rail, telecommunications, gas and electricity regulators were joined by BT, Shell, Transco and Trailtrack to agree ways to reassure the public that their computers were being adapted to avoid the bug.
Action 2000's chairman, Don Cruickshank, warned that any private firms that failed to prepare adequately for the change could be penalised with the withdrawal of their licences.
In one key sanction, BT and Cable and Wireless have been told they will be given the power to disconnect firms that corrupt phone connections.
Nineteen key sectors of the economy on which the country depends have been identified by Action 2000, with power, water, transport, oil, telecommunications and finance judged the most critical for preventative action.
The group is insisting that all private and public bodies involved in maintaining the infrastructure should have their plans to tackle the bug independently assessed.
The different bodies will share information so they can declare by next summer that the public has little to fear from the millennium.
Mr Cruickshank said: "The aim is disclosure amongst the members of this group so that confidence is high that it will be `business as usual' when the day comes.
"We are all commmitted to functioning as closely as possible to normal on the day. This is crucial for the British economy. Elements of the national infrastructure underpin everything else and everyone is reliant on them."
Mr Cruickshank met Home Office officials earlier this week to discuss its plans to encourage emergency planning at local level. Emergency powers could be invoked in the worst-case scenario, he said.
Home Secretary Jack Straw is ultimately responsible for emergency planning as chairman of a body called the Civil Contingencies Committee. The Home Office Emergency Planning Division will meet this month to firm its own proposals.